Good news for businesses relying on arbitration agreements

In a 7-1 decision, the U.S. Supreme Court recently corrected another state court judgment showing hostility toward arbitration.

In Kindred Nursing Centers Limited Partnership v. Clark, the court turned back the Kentucky Supreme Court’s holding that only powers of attorney that specifically authorize a representative to waive his principal’s fundamental constitutional right of trial by jury may enter into enforceable pre-dispute arbitration agreements that bind the principal.

The decision should hearten those that expect courts to enforce their arbitration agreements.

What the decision means for your business

Kindred v. Clark is a great result for businesses that rely on arbitration agreements to resolve their disputes.

The court closed a perceived loophole in the Federal Arbitration Act (“FAA”) that threatened to undermine it. That the court decided to hear the case is itself significant.

The court generally is not interested in ordinary “error correction,” and prefers cases that present a split in decisions among lower courts. No such split was present here, and Kentucky’s rule would apply just in that state. The court took the case anyway and employed an unusually condescending tone in its decision, showing that the court means business when it comes to arbitration; it does not tolerate hostility to the FAA.

In years past, the court has not paused to rein in state courts when they are unfriendly to arbitration agreements — for example, by declaring them void in certain instances as against state public policy. So state courts bent on thwarting the FAA have gotten creative, by using covert and indirect methods like the clear-statement rule the Kentucky Supreme Court adopted in Kindred.

But because state courts are called upon most frequently to apply the FAA, it is ever more important that state supreme courts do so faithfully. It is encouraging to see the court stamp out hostility to arbitration, especially when the animus is concealed. If state courts continue to innovate in this area, we expect the court again to step in and demand that state courts respect the reasonable expectations of businesses that their arbitration agreements will be honored like any other contract.

The dispute

Kindred Nursing Centers operates nursing homes and rehabilitation centers. Two of its residents authorized family members to act for them, by executing written powers of attorney. The family members signed paperwork to admit the residents to the nursing center.

In one document, the resident agreed to arbitrate “any and all claims or controversies arising out of or in any way relating to . . . the resident’s stay at the facility.” Following the residents’ death, their respective estates filed lawsuits against Kindred in a Kentucky state court.

The state court refused to dismiss the lawsuits in favor of arbitration. Affirming the decisions, the state supreme court created a “clear-statement rule,” under which a representative could waive his principal’s right to have disputes tried in court (rather than arbitrated) only if the power of attorney expressly so authorized. The U.S. Supreme Court agreed to hear the case.

The court’s nearly unanimous decision

Following a lively oral argument earlier this year, the court on May 15 vacated the Kentucky Supreme Court’s judgment and remanded.

Writing for the court, Justice Elena Kagan offered a compellingly simple reason: the Kentucky Supreme Court failed to place arbitration agreements “on equal footing” with other contracts, in violation of the Federal Arbitration Act.

Kagan made short and easy work of the Kentucky court’s claim that it was not discriminating against agreements to arbitrate because the court would require specific authority for an agent to waive his principal’s other fundamental constitutional rights as well.

“But what other rights, really?” Kagan asked.

The state court had said, for example, that a representative without specific authority could no longer waive his principal’s right to “worship freely or consent to an arranged marriage or bind her principal to personal servitude.” But the rights to “acquire and protect property” and to “freely communicate thoughts and opinions” were fundamental too, Kagan observed, and yet the state court “nowhere cautioned that a representative would now need a specific authorization to, say, sell her principal’s furniture or commit her principal to a nondisclosure agreement.”

The “slim set of both patently objectionable and utterly fanciful contracts” the state court hypothesized, and its decision to lump in arbitration agreements with that class rather than with “routine contracts executed day in and day out by legal representatives,” she said, laid bare the very hostility to arbitration the FAA sought to stop.

Remarkable on this point was the court’s willingness to discredit the Kentucky Supreme Court’s claim that it would apply the clear-statement rule across the board, and require a power of attorney to specifically allow a representative to waive any fundamental constitutional right before enforcing the waiver. If that were true, the clear-statement rule would not be “singling out” arbitration agreements for disfavored treatment.

As a matter of federalism and respect for state courts, our national supreme court typically takes state courts at their word on such matters. But not here, which signals that the court continues to be especially vigilant to protect the federal policy favoring arbitration.

The respondents also argued that the FAA does not reach contract formation issues, and requires only the enforcement of arbitration agreements validly made.

The state court’s clear-statement rule, respondents therefore claimed, was okay because it governed only whether an arbitration agreement was validly formed. Kagan swiftly dispatched with the attempted dichotomy, observing that the FAA also requires courts to treat arbitration contracts as “valid,” such that state-created barriers specific to forming arbitration agreements are likewise off limits.

The respondents’ reading of the FAA, Kagan noted, would make it “trivially easy for States to undermine the Act –indeed, to wholly defeat it,” for in the extreme, states could simply “declare everyone incompetent to sign arbitration agreements.”

Britton St. Onge is a commercial litigation associate at Polsinelli in St. Louis. He can be reached at bstonge@polsinelli.com or 314-889-7024.